Finance

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Japan's traditional approach of supporting its own is fast becoming more of an urban myth than actual practice.

Announcing third-quarter results earlier this week, the nation's largest lender, Mitsubishi UFJ Financial Group, reported that its overseas lending increased by 847.6 billion yen ($7.2 billion) to 43.3 trillion yen as of Dec. 31. One more quarter of that and Mitsubishi UFJ will have more loans booked offshore than at home, where total advances for the period came to 43.7 trillion yen. Judging by the interest rates Japanese companies are paying, that's a pretty sure bet.

Steadily Gaining Ground
Loans to companies overseas used to comprise 30.2% of MUFG's total lending versus 38.2% now
Source: MUFG company presentation

So much for lower borrowing costs giving Japan a boost. For economists, it's further confirmation that central banks are reaching the limits of their powers over real activity. For investors, it means that buying shares in Japanese banks is as much a bet on the health of corporates in Thailand, China or Malaysia as it is on those with headquarters in Tokyo.

Sour Growth
The share of bad debts that Mitsubishi UFJ imports is on the rise
Source: Company reports

That’s good news for those who believe the arrows in Bank of Japan Governor Haruhiko Kuroda’s quiver aren’t enough to spark inflation and reignite growth in the world’s third-largest economy. For anyone worried about rising defaults in China or concerned about the effects of cratering commodity prices on companies in Malaysia, however, it's cause to pause.

Polar Opposite
Soured debt in China is heading in the other direction
Source: MUFG, PBOC

And to remember that while Mitsubishi UFJ is something of a poster child for international lending, it's not alone. Mizuho Financial Group said last week that it boosted overseas loans by $7.6 billion in the three months to Dec. 31, more than the $7.4 billion increase in domestic lending. Sumitomo Mitsui Banking also reported faster loan growth abroad than at home.

It's hard to blame them. In the three months ended Dec. 31, large companies in Japan paid Mizuho just 52 basis points more than it's currently getting on deposits domestically. Its average margin on foreign loans meanwhile was 93 basis points.

But as any investor knows, chasing yield has its dangers.  Bank of Tokyo Mitsubishi, whose parent is Mitsubishi UFJ, wrote off 38.2 billion yen of unpaid loans in the six months to Sept. 30, 12 percent more than a year earlier. While it doesn't give a breakdown of whether foreign borrowers were to blame, the coincidence is conspicuous. Stock in Nomura tumbled Wednesday after Japan's biggest brokerage postponed a target for making its overseas operations profitable.

Uniformly Bad
Japan's megabanks have had a less than stellar six months
Source: Bloomberg

Perhaps the additional ticket Japanese banks are clipping from their offshore lending will longer term prove worth the risk. And so long as inflation and growth remain negligible and rates stay negative at home, they'll continue to search for business elsewhere. But with expansion in China last year the slowest in a quarter century and other economies in Asia not exactly immune to external shocks, prudence when approaching megabanks -- whose shares have lost 28 to 37 percent over the past six months -- would be investors' wisest course.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net